Extended-lister
Showing 111 - 120 of 152 entries
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Research Report
Measuring Risk on Credit Indices: On the Use of the BasisIn this paper we examine the evolution of fair spreads on credit indices since 2005 and investigate the various alternatives to provide risk measures on these products. We first review the mechanics of these indices. We show how market fair spreads can be decomposed into three components: the average fair spread over the reference basket, a term representing the basket heterogeneity, and the basis. From our analysis, this basis should be understood as an additional risk factor. For a risk...
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Research Report
Capturing Risks of Non-transparent Hedge FundsWe present a model that captures risks of hedge funds only using their historical performance as input.This statistical model is a multivariate distribution where the marginals derive from an AR(1)/AGARCH(1,1) process with t5 innovations, and the dependency is a grouped-t copula. The process captures all relevant static and dynamic characteristics of hedge fund returns, while the copula enables us to go beyond linear correlation and capture...
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Research Report
Extensions of the Merger Arbitrage Risk ModelA traditional VaR approach is not suitable to assess the risk of merger arbitrage hedge funds. We recently proposed a simple two- or three-state model that captures the risk characteristics of the deals in which merger arbitrage funds invest. Here, we refine the model, and demonstrate that it captures merger and acquisition risk characteristics using over 4000 historical deals. We then measure the risk of a realistic sample portfolio. The risk...
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Research Report
Merger Arbitrage Risk ModelA traditional VaR approach is not suitable to assess the risk that merger arbitrage funds carry in their portfolios. We propose a simple two-state or three-state model that captures the risk characteristics of the deals in which merger arbitrage funds invest. This model has been tested on a set of mergers and acquisitions between large US public companies in 2005.
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Research Report
Incorporating Equity Derivatives into the CreditGrades(tm) ModelRobert Stamicar and Christopher C. Finger present an extension of the CreditGrades model which allows for joint pricing of credit and equity derivatives. We had examined the use of implied volatility in the CreditGrades model in 2002, and presented some of these results in the CreditGrades Technical Document. The framework here is more robust, however, in that it makes the appropriate adjustments to the standard Black-Scholes volatilities; these adjustments are necessary since under the...
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Research Report
Risk Budgeting for Pension PlansJorge Mina provides the third in a series of articles, begun in the Winter 2003 issue, relating to the theme of risk attribution. In the previous articles, we have presented risk attribution schemes for equity and fixed income portfolios by first describing the relevant performance attribution schemes, and then defining the risk attribution schemes in parallel. Jorge extends this body of work by presenting methods for risk budgeting that rely on risk attribution as a key input. Ultimately,...
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Research Report
Distribution of Defaults in a Credit BasketPete Benson presents an interesting special case of the standard credit portfolio derivatives pricing model. Closed-form solutions are in short supply for these models, particularly for non-trivial values for correlation. Pete noticed this somewhat surprising result in preparing examples of the model. Once he found the proof, Pete proceeded to challenge a number of the research group members with the problem, and the problem has now become a standard interview question here.
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Research Report
Liquidity Risk: Current Research and PracticeThis article presents a survey of current thinking and practice regarding liquidity risk. We place the notion of liquidity risk as understood by risk managers in financial institutions in the broader context of liquidity as understood by treasury managers, institutional investors and traders, and central bankers. The article also presents and discusses critically two widespread approaches to measuring liquidity risk for individual securities, and discusses the problems that arise in...
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Research Report
Examples and Applications of Closed-Form CDO PricingWe describe a model for closed-form CDO pricing based on conditional independence in a onefactor model. We use the model to follow a sample deal over an 18-month period of declining credit quality, and give examples to show how changes in the correlations and spreads of the collateral pool affect individual tranches. We point out implications of our results for risk managers.
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Research Report
Hypothesis Test of Default Correlation and Application to Specific RiskThis paper carries out hypothesis tests on credit migration correlations. It tests both the correlation between obligors and the correlation between credit events and systematic market factors, concluding that neither correlation is significantly larger than zero at short risk horizons. The result indicates that the use of positive credit migration correlations to calculate specific risk for trading portfolios results in an overestimation of required capital.